[Federal Register Volume 62, Number 111 (Tuesday, June 10, 1997)]
[Notices]
[Pages 31650-31652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15156]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38708; File No. SR-NYSE-97-01]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change by the New York Stock Exchange, Incorporated 
Regarding Changes in its Margin Rules

June 2, 1997.

I. Introduction

    On January 9, 1997, the New York Stock Exchange, Incorporated 
(``NYSE'' or the ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend certain sections of the 
Exchange's rules to comply with changes to Regulation T which became 
effective June 1, 1997.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38411 (March 17, 1997), 62 FR 14174 (March 25, 
1997). The NYSE submitted a written clarification regarding its filing 
to the Commission on May 29, 1997.\3\ No comments were received on the 
proposal.
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    \3\ See Letter from Donald van Weezel, Managing Director, 
Regulatory Affairs, NYSE, to Michael Walinskas, Senior Special 
Counsel, Division of Market Regulation (``Market Regulation''), 
Commission, dated May 29, 1997, clarifying requirement relating to 
the proposed permitted market-maker offset provisions.
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    This order approves the proposed rule change.

II. Description of the Proposal

    The NYSE proposes to make revisions to its rules governing margin 
that will establish NYSE rules to govern areas of margin regulation 
that will no longer be addressed by Regulation T (``Regulation T'') \4\ 
of the Board of Governors of the Federal Reserve System (``Federal 
Reserve Board,'' ``FRB'' or ``Board''). The Federal Reserve System's 
Regulation T, which covers the extensions of credit by and to brokers 
and dealers, currently prescribes margin requirements for options 
transactions. In April 1996, the Federal Reserve Board amended 
Regulation T to delete certain rules regarding options transactions in 
favor of rules to be adopted by the options exchanges and approved by 
the

[[Page 31651]]

Commission.\5\ This amendment to Regulation T became effective June 1, 
1997.
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    \4\ 12 CFR 220.1 through 19 (1996).
    \5\ See 61 FR 20386 (May 6, 1996) (Federal Reserve Board's 
release adopting certain changes to Regulation T).
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    The proposed amendments incorporate the current FRB requirements 
into Exchange Rule 431 so that they may remain in effect after June 1, 
1997. The proposed amendments also incorporate certain treatments of 
offset positions as recognized under Exchange Act Rule 15c3-1, the 
``Net Capital Rule.''
    Specifically, a permitted offset position will be defined to mean, 
in the case of an option in which a specialist or market-maker makes a 
market, a position in the underlying instrument or other related 
instrument, and in the case of other securities in which a specialist 
or market-maker makes a market, a position in options overlying the 
securities in which a market-maker makes a market, if the account holds 
the following positions: (i) A short option position which is ``in- or 
at-the-money'' and is not offset by a long or short option position for 
an equal or greater number of shares of the same underlying security 
which is ``in-the-money''; (ii) a long option position which is ``in- 
or at-the-money'' and is not offset by a long or short option position 
for an equal or greater number of shares of the same underlying 
security which is ``in-the-money''; (iii) a short option position 
against which an exercise notice was tendered; (iv) a long option 
position which was exercised; (v) a net long position in a security 
(other than an option) in which a specialist makes a market; (vi) a net 
short position in a security (other than an option) in which the 
specialist makes a market; or (vii) a specified portfolio type as 
referred to in Exchange Act Rule 15c3-1--Appendix A.\6\
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    \6\ See Securities Exchange Act Release No. 38248 (February 6, 
1997) 62 FR 6474 (February 12, 1997) (Final rule adopting changes to 
Exchange Act Rule 15c3-1) (the ``Net Capital Rule'').
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    These proposed amendments to Rule 431 adopt provisions regarding 
permitted market-maker and specialist offset positions from Regulation 
T and the Net Capital Rule. These offset positions would be subject to 
the same ``good faith'' margin treatment as has been accorded under 
Regulation T and would require the clearing/carrying firm to comply 
with the applicable haircut requirements of the Net Capital Rule for 
any cash margin deficiency (e.g., the difference between the margin 
required under Rule 431 and the amount received from the specialist/
market maker). The proposal also incorporates the current Regulation T 
definitions of the terms ``in- or at-the-money'', ``in-the-money'' and 
``overlying options.'' The parameters for permitted offsets within the 
``in- and at-the-money'' definition have been expanded from one to two 
``standard exercise intervals.''
    The ``Good Faith'' margin requirements in Section (f)(2)(J) of Rule 
431 as proposed to be amended shall be applicable for registered 
options specialists' and market-makers' transactions in listed options 
in which the specialist or market-maker makes a market, and registered 
options specialists' or options market-makers' permitted offset 
transactions as defined in Section (f)(2)(J) (i)-(vii) of Rule 431, 
when such transactions are effected for market-making purposes. This 
requirement will ensure that permitted offset transactions are in fact 
reasonably related to the specialist's market-making function and are 
not effected for the purpose of speculation on a margin basis which is 
applicable only to market-makers and specialists.
    Section (f)(2)(J) of Rule 431 has been revised in order to clarify 
the existing definition of ``good faith'' margin requirements.
    A new provision has been added (Section (f)(2)(L) of Rule 431) to 
incorporate the provisions currently contained in Regulation T 
regarding ``exclusive designation'' that allow a customer to designate 
which security position in an account is to be utilized to cover the 
required margin at the time an option order is entered, provided the 
member organization offers such a service.
    Further, Section (f)(2)(M) of Rule 431 has been added to 
incorporate the current provisions of Regulation T that allow certain 
defined options-related transactions to be maintained in a cash account 
and incorporate a debit put spread provision involving European-style 
broad-based index options that is consistent with a similar Chicago 
Board Options Exchange provision.

III. Discussion

    After careful review of the Exchange's proposed amendment to its 
margin rules, and for the reasons discussed below, the Commission 
believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges, and, in particular, with 
the requirements of Section 6(b) of the Act.\7\ Specifically, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
to prevent fraudulent and manipulative acts, and, in general, to 
protect investors and the public interest.\8\
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    \7\ 15 U.S.C. 78f(b).
    \8\ In approving these rules, the Commission has considered the 
proposed rules' impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that the portions of the proposal that 
revise the applicable standard governing option market-maker and option 
specialist permitted offsets are reasonable. The revised standards 
serve to maintain the requirement that good faith margin may only be 
extended for bona fide market making related transactions, including 
hedging transactions that are reasonably related to a market-maker's 
assigned responsibility. The permitted offsets listed in proposed 
Section (f)(2)(J) (i)-(vi) of Rule 431 simply incorporate the formerly 
``permitted'' Regulation T offsets which have been deleted in favor of 
exchange rules. The incorporation of these offsets does not raise any 
new regulatory issues and, accordingly, is reasonable. The permitted 
offsets listed in proposed Section (f)(2)(J)(vii) of Rule 431 
incorporate those permitted offsets allowed under Exchange Act Rule 
15c3-1 for purposes of determining broker-dealer net capital 
requirements. Incorporating these same offsets for the related purpose 
of determining applicable options market-maker and specialist offsets 
constitutes a reasonable effort to coordinate risk management 
requirements that serve similar purposes.
    The Commission believes that the proposal is a reasonable effort by 
the NYSE to accommodate the needs of options market-makers and 
specialists in undertaking their market-making responsibilities as it 
recognizes the occasional need for these entities to effect 
transactions in their course of dealing in options classes for which 
the options market-maker or specialist is not registered. The 
Commission believes that this approach will not adversely affect the 
depth and liquidity necessary to maintain fair and orderly markets. The 
Commission expects that those clearing firms and other broker-dealers 
that are bound to comply with the NYSE's margin rules, in extending 
margin to options market-makers and specialists, will implement 
adequate procedures to ensure that offsets elected by options market-
makers and specialists are recorded accurately and

[[Page 31652]]

cleared into appropriate accounts. The Commission believes that these 
requirements will ensure that transactions effected by options market-
makers and specialists are in fact reasonably related to their market-
making function and are not effected for speculative purposes on a 
margin basis which should be available only for bona fide market-making 
activity.
    The Exchange's proposed definition of ``in- or at-the-money,'' for 
purposes of permitted offset transactions, represents a codification of 
a long standing practice among the options markets, of permitting the 
financing of options specialists and market-makers underlying stock 
positions on a good faith basis when offset on a share-for-share basis 
by options which are ``in-or at-the-money,'' i.e., where the current 
market price of the underlying security is not more than two standard 
exercise price intervals below (with respect to a call option) or above 
(with respect to a put option) the exercise price of the option. The 
Commission believes it is appropriate for the NYSE to codify this 
longstanding practice. This practice is also being codified today by 
the Chicago Board Options Exchange.\9\
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    \9\ The Commission notes that the Chicago Board Options Exchange 
asserts that it has received oral no-action relief from the Federal 
Reserve Board permitting the two standard exercise price interval 
interpretation. See Securities Exchange Act Release No. 38709 (June 
2, 1997).
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    The Exchange has also revised existing Section (f)(2)(J) of Rule 
431 to clarify the existing definition of ``good faith'' margin 
requirements. The change in the definition of ``good faith'' margin 
requirements effectively creates a minimum good faith margin 
requirement, and, accordingly, is reasonable.
    The Exchange has also added a new Section (f)(2)(L) of Rule 431 
which incorporates the provisions currently contained in Regulation T 
regarding ``exclusive designation'' that allow a customer to designate 
which security position in an account is to be utilized to cover the 
required margin at the time an option order is entered, provided the 
member organization offers such a service. This section merely 
incorporates existing provisions of Regulation T into the Exchange's 
rules, and, accordingly, is reasonable.
    The Exchange's proposed new Section (f)(2)(M)(i) of Rule 431 merely 
incorporates those provisions of Regulation T that allow certain 
defined options-related transactions to be maintained in a cash account 
and, accordingly, does not raise new regulatory issues. The other part 
of this proposed section incorporates a debit put spread provision 
involving European-style broad-based index options that is consistent 
with a similar Chicago Board Options Exchange provision. Accordingly, 
the Commission finds it reasonable for the NYSE to adopt this similar 
provision.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (NYSE 97-01) is approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15156 Filed 6-9-97; 8:45 am]
BILLING CODE 8010-01-M